How will COVID-19 affect people who have taken loans especially from non-formal sources of credit?
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Answer:
KEY POINTS
India's economic recovery from the coronavirus crisis could be delayed if lenders stop lending to borrowers with low credit scores or charge them a much higher interest on loans.
Millions of daily wage-earners have lost their jobs since the lockdown started. Others, particularly in the services sectors, have been furloughed.
Small businesses owners are particularly at risk of defaulting as they do not have the wherewithal to survive prolonged halt in economic activity, Sanjeev Prasad from Kotak Institutional Equities told CNBC.
GP: India banks
Branches of State Bank Of India, Syndicate Bank and Canara Bank in New Delhi, India.
Pradeep Gaur | Mint | Getty Images
India's economic recovery from the coronavirus crisis could be delayed if banks stop lending to borrowers with low credit scores, or charge them a much higher interest on loans.
The financial sector faces an erosion of loan growth and higher credit costs as it prepares for a rise in bad debt from retail and corporate borrowers — and with India's lockdown extended again, the economic impact could exacerbate.
"I think banks would also want to be a lot more careful in terms of incremental lending," Sanjeev Prasad, managing director, and co-head at Kotak Institutional Equities, told CNBC. He explained that a lot of borrowers who would have previously received loans from banks and non-bank financial institutions would not qualify if lenders become more stringent over whom they lend to. "It will have its own repercussions on recovery in the economy going forward."
Bad loans are going to increase and the longer the lockdown, the more prolonged the economic recovery, the more it will be the increase in bad loans.
Sanjeev Prasad
KOTAK INSTITUTIONAL EQUITIES
India this week entered another 2-week extension of its national lockdown which began in late March.
The country extended its lockdown twice as infection cases continued to rise, and is currently expected to lift restrictions on May 18. Still, there has been some easing of rules, especially in low-risk areas, though most economic activities remain on hold.
Three types of borrowers at risk
Millions of daily wage-earners have lost their jobs since the lockdown started, while others, particularly in the services sectors, have been furloughed.
"Bad loans are going to increase and the longer the lockdown, the more prolonged the economic recovery, the more it will be the increase in bad loans," Prasad said in a late-April interview before India extended the lockdown for a second time.
Bankers and government officials already expected bad loans to potentially double as the outbreak brought economic activity to an abrupt halt, Reuters reported. For its part, the central bank had already anticipated an increase in bad debts between September 2019 and September 2020, before the Covid-19 crisis occurred.
A few months of lost income and the resulting rise in the retail delinquency rate could prove to be a potential double whammy for the banks on top of the expected surge in corporate defaults.
Kunal Kundu
SOCIETE GENERALE
Prasad said there are three segments of borrowers that are of concern: First, the micro, small and medium-sized companies which, unlike the larger corporations, do not have the financial ability "to withstand any sort of slowdown in business for an extended period of time."
Another segment would be the retail borrowers who take personal, unsecured loans and are likely to face job losses. Finally, the microfinance institutions are also at risk. They mostly give small, unsecured loans to daily wage earners, many of whom do not currently have income due to the lockdown.